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Economic and Financial Market Update: Feelin' The Blues

13 August 2021

Summary:

Consumer and business confidence has been hit by the length and severity of the Greater Sydney-plus lockdowns;
But actual business conditions and views about the state of family finances have held up better;
The data so far is consistent with negative economic growth in Q3;
The outlook for the following couple of years remains positive.

The economy entered the third quarter powering along in top speed. It then hit a pothole created by the Greater Sydney (-plus) lockdowns. Business confidence has declined sharply, with the decline to date reminiscent of what took place during the Melbourne lockdown of last year.

The decline in firms’ views about business conditions has not been as stark. The worry is that new orders are starting to thin. Price rises remain a visible part of the business landscape. But in many cases firms’ have had to raise prices as their input costs have risen strongly.

Lockdowns are impacting regions and industries differently. The current lockdown is having a bigger impact on NSW than the other states. The mining sector is reporting the strongest conditions, with things toughest in the transport and recreation sectors.

One good sign is that employment intentions are still quite high. This suggests that a good portion of firms still have confidence about the future. But intentions (and job ads) have started to decline. Households have noticed a change in temperature in the jobs market. Fear of unemployment has risen across states, particularly in NSW.

There has been a reduction in confidence about buying a home over the past couple of months. A combination of increased fear of unemployment and the big house prices making home purchases less affordable has likely weighed on sentiment. Despite the fall in buying sentiment house price growth is likely to remain strong over the remainder of this year. In places most impacted by lockdowns (notably Sydney) house prices are being supported by a decline in the supply of new listings. And the extremely low level of interest rates and rising house prices makes housing an increasingly attractive asset class for investors’.

The path out of the pandemic was always going to be bumpy and not a smooth straight line. Economic growth will be weak in Q3. What happens in Q4 will depend upon the effectiveness of the lockdowns and the efficiency of the vaccine rollout. The data to date is consistent with the pace of the economy we saw in Q3 2020. And clearly better than what was posted in Q2 last year (-7%). The outlook for 2022 remains good.